Denishia Martin's Energy Outlook ...
Denishia Martin's Energy Outlook ...
Oil and Gas Prices Will Ooze Upwards
Again
by Denishia Martin
When
crude oil prices hit a 12 year low around the globe in June, investors began
asking "Why?" The answer is basically three-fold: 1) excess inventories,
2) lagging Asian demand and 3) the El Nino-mild winter of 1997. Will the
prices go back up? Yes. The reason is three-fold: 1) a sell off of excess
supplies due to 2) the OPEC (Organization of Petroleum Exporting Countries)
plus Russian (non-OPEC) agreement to reduce supplies and 3) the storage
build-up for winter's coming demand. Essentially, the price fell due to
a market glutted with available oil; by reducing the supply in anticipation
of the demand, the price goes up. Economics 101 in a global classroom.
Creating The Glut
After
suffering the oil embargo of 1973 and the standoff with the Iranian revolution
in 1978, U.S. oil companies changed their strategies to become less dependent
on foreign oil. Domestic exploration was aggressive; oil was $50 per barrel.
But the 80's brought a recession and an oil glut. In November 1985, the
price of crude dropped from $32 to $10 per barrel.
Through
an effort to survive this economic crisis, American oil and gas companies
became "leaner and meaner." Downsizing among top-heavy management,
selling off vast holdings of reserves and reducing stock-piled inventories
were among the more radical corporate restructuring techniques that were
applied. As the companies got smaller, they got smarter. Technology, not
manpower, became the primary objective for maintaining control of the industry.
Technological
advances revitalized the entire oil and gas industry. The more companies
relied on the new science of 3-D seismic, horizontal drilling and innovative
fracturing methodologies, the more successful they became in the discovery
of hydrocarbons. And they were able to control their finding costs at the
same time. Success rates are improved, too. In the past decade, new technological
applications have increased success rates from 25% to 50%, or from one strike
in four to one strike in two. Today, companies can maintain a margin of
profit with a per barrel price of $16.
Technology,
too, has added to the current low price of oil globally. New drilling techniques
added an additional 4.8 billion barrels of oil to the world supply between
the years of 1991 and 1995 from the North Sea alone. Other applications
increased the known reserves in Alaska's Prudhoe Bay by 40%. While increasing
the known reserves and the production, technological advances have also
reduced the finding and production costs for both oil and gas by approximately
20%. Bill Gilmer of the Dept. of Energy reports the industry can thrive
at $17 per barrel for oil and $1.70 per thousand cubic feet of natural gas.
Now
that the industry has successfully reduced the cost of exploration, development
and production, making exploitation of the more vast reserves more feasible,
too much oil and gas has flowed into the market place. In anticipation of
an increasing demand from the developing economies or the Pacific Rim, the
surplus was considered both necessary and valuable. But, these countries
are experiencing a depressed economy, not the robust growth the world awaited.
The demand for oil, too, is depressed. Prices fall where supplies are abundant.
Then, there was El Nino. One of the mildest winters on record throughout
most of the United States and Europe left surplus inventories of oil and
gas begging to be consumed. Too much oil; too little demand; prices plummet.
Controlling The Glut
The
vast quantities of oil in the world is controlled by OPEC and a few other
producing countries. Saudi Arabia, who ranks #1 with 26%, along with its
neighbors in the Persian gulf, control a full 60% of the entire known oil
reserves of the world. For this reason, OPEC has a definite advantage to
controlling the price for oil around the world. After three meetings this
year to discuss the global production, 10 OPEC member countries and 7 non-member
countries announced in June that they were committing to slashing supplies
by more than 4.3%. That figure translates to 3.23 million barrels of oil
per day on the global market. Their efforts are aimed at reducing the quantity
of available oil, thereby increasing the price worldwide for the previous
commodity.
The
United States currently has in storage approximately 340 million barrels
of oil, which represent approximately 5% more than normal for this time
of the year. Reducing surplus in the U.S. will take some time and production
will most likely drop considerably, while per barrel prices remain near
that 12 year low mark. However, supplies will be used in time and prices
will increase as storage facilities around the world deplete their reserves.
The
summer of 1998, unlike the winter of 1997, is proving to be one of the most
severe on record. Daily announcements of record highs across the nation
indicate the heat wave that has lingered in America's mid-section since
spring and has utility companies pleading for conservation in order to meet
the demands of their customers. Companies in the western states are telling
employees to stay at home while utility giant, Cinergy, had to make choices
on their service to various sections of their deregulated area of service.
The hurricane season shows signs of being severe and, if so, could disrupt
the production of oil and gas in the Gulf of Mexico.
The
economies of the Asian countries will rebound and the growth once anticipated
will emerge. These countries, who together comprise 40% of the world's population,
will become the world's largest consumers of oil and gas, forcing the United
States into second place. When this growth begins the demand for oil and
gas will increase daily and at alarming rates. As their manufacturing and
industrial companies switch from high-sulfur coal to cleaner, more efficient
natural gas, the demand will sky-rocket over a short time. As the population
becomes mobilized and the need for transportation is realized for the first
time for many, the consumption of gasoline will exceed all projected numbers.
The awakening of the economies of this part of the world will revolutionize
the energy market as nothing has ever before in history.
Supplies
will be reduced and prices will be altered according to that availability
and demand around the world. Prices will increase even if they have to be
artificially stimulated by the oil and gas gurus of the petroleum industry.
In the meantime, "buy low and sell high" is always the mantra
of the investor. I have a brand new company for you to add to your portfolio.
Kismet Energy Corporation is brand new and sitting on top
of 9 trillion cubic feet of gas and 240 million barrels of oil. Their stock
symbol OTC BB KISS (I just love that!) is trading at under $2.00 and has
earned a targeted "buy" recommendation up to $7.50. Like the great
commodities they will produce, their price is low now, but not for long!
Editor's Note: Denishia Martin is a free lance writer for the oil and gas industry and a regular contributor to the Bull and Bear Financial Report. She is also the founder and president of Martin & Sons, Inc., a public relations firm specializing in the oil and gas industry. All information included is copyrighted and available for reproduction only through reprint permission. Unauthorized reproduction is strictly prohibited. Contact Ms. Martin at 1213 High Street, Bowling Green, KY 42101 or at 800-972-5529 or 502-793-9475 via fax @ 502-782-5713 or E-mail: DenishiaM@aol.com.
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